Public Power - September 2008 - (Page 12)

10 QUESTIONS power system stays reliable in the long term. With this, the long-term system planning function is important. Once again, that was done in the past and continues to be needed today. Think about what drives cost in the marketplace—it’s really how one goes about ensuring for a reliable system and the obvious infrastructure cost associated with it. Ultimately, the electricity produced is a function of the fuel burned to produce it. Our job is to choose and run the cheapest resources that bid into the marketplace. Now, the unfortunate thing is that in the past 10 years or so that the ISOs have been in operation, we’ve seen a tremendous run-up in costs in all aspects of the marketplace. The one that’s most visible to everyone is fuel costs. We’ve seen natural gas prices rise from $1 to $2 per million Btus in the early 1990s through the early part of this decade to around $12 per million Btus. And, of course, everyone has seen what has happened to the price of a barrel of oil over the last several years. Coal has done the same thing. Fuel costs have doubled, tripled, quintupled in some instances and there is no escaping having to pass on those costs to consumers. The other issue is ensuring reliable infrastructure. If one looks at what it takes to build a power station or a transmission line today, it’s many times more costly because of the surge in commodity prices. The demands that the booming global economy have put on the source of raw materials—China and India are two notable examples— have caused prices for all of these raw materials to go up—steel, copper, etc., and that drives up the cost of the capital infrastructure. So, to come back to your question, no organization, no structure would have prevented the run-up in costs that I’ve just described. Were it not for the RTOs and ISOs, those costs would actually have been higher. There have been significant efficiency gains as a result of the RTOs and ISOs using competition and system planning to drive system efficiencies. 2 Gordon van Welie Gordon van Welie is president and chief executive officer of ISO New England. Jeanne LaBella interviewed him on July 29, 2008. 1 Many consumer-owned electric utilities have found the move to regional transmission organizations to be costly and anti-consumer. What is the point of having RTOs if they do not reduce electricity costs for consumers? RTOs and ISOs serve three functions that have to be performed: reliable dispatch of the power system, leastcost optimization of resources to supply energy, and long-term power system planning. We have to look at where the RTOs come from. Most of the Northeast RTOs are based on the power pools that formed many decades ago, so the responsibilities we perform today, relative to the responsibilities performed historically, are really very similar. First, reliable dispatch of the power system is something we have to do; it’s a 24 by 7 operation. “Least-cost optimization of resources selected to supply energy” is a long-winded way of saying we have to make sure the lowest cost generator is dispatched at any point in time during the course of the day. Third, is the issue of how to make sure the bulk 12 SEPTEMBER 2008 What benefits has ISO New England brought to the electricity market? Let me come back to those three functions—the reliable operation of the power system, the least-cost optimization of resources and long-term power system planning. Those three functions are largely the same today as they were historically. But four main differences have resulted from the restructuring of the industry. The first is the shifting of investment risk. If you go back to the previous paradigm, cost-of-service regulation, the vertically integrated utilities had their investments guaranteed by ratepayers. In fact, the huge cost overruns on the nuclear power plant buildouts in the 1970s and ‘80s drove New England to seriously consider restructuring. With restructuring, the risk of poor investments was shifted away from consumers. Efficient investment would ultimately have to be paid by consumers, but, you don’t want them to carry the burden of poor investments. About 10,000 megawatts of new clean gas-fired electric generation were built in New England in the first six years of this decade. In percentage terms, that’s almost a third of all capacity in this system—all of it brand new and pretty efficient. A number of mistakes were made. A lot of investors overpaid or didn’t manage their projects properly and there were billions of dollars of investments written off by investors that consumers never had to pay for. This was a dramatic change from the previous paradigm, where consumers were always on the hook for all investment decisions, whether they were good or not. The second thing that has improved through competition is the availability of power system resources. Our generation availability has improved by almost 10 percent over the past decade or so. That ultimately means you need less generation on the system to meet demand. Or, to put it another way, if demand continues to increase, you need to build less generation to keep up with it. I’ll give you one anecdote, which I PUBLIC POWER

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Public Power - September 2008 Contents Perspective 10 Questions What’s Good About RTOs? Capturing Coal’s Carbon Carbon Safety Valves Greater Glass, Greater Savings Getting Customers to Embrace Compact Fluorescent Lights LEEDing Green Kansas City Shows How to Build Green For Governing Boards Safety Community Broadband Hometown Connections Parting Shot

Public Power - September 2008

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